Can Gold Prices Repeat Q1’s Heroic Move?

The price of gold soared last quarter, but it may have just been a blip in a bigger downtrend

While it’s true that gold prices have retreated more than a little bit in the latter half of March, with the SPDR Gold Trust (GLD) falling a little more than 5% since its March 14th peak, there’s no denying that gold still has been one of the market’s bright spots since the beginning of the year.

As of the latest look, the price of gold is still up 8.8% since the end of 2013. And that gain couldn’t have come at a better time. Gold prices were on the verge of officially going from bad to worse in the latter part of December, and the first quarter’s strong rally restored some much-needed faith in the world’s favorite precious metal.

As the saying goes, though, that was then and this is now. Is the price of gold poised to do in Q2 what it did in Q1? Or, are gold prices going to slump again, pushing the metal to the new multi-year lows it barely sidestepped three months ago? Unfortunately for the gold bulls, it’s most likely going to be the latter.

Not Much Left to Buoy Gold Prices

Not to turn this into a lesson, but boiled down to its simplest components, the price of gold is largely driven by four factors. In the short run, gold prices are inversely correlated to interest rates, and the U.S. dollar. In the long run, gold prices are mostly impacted by inflation and real demand… actual buying (or selling) of raw gold.

Regardless of the timeframe and factor in question, however, the odds seem stacked again gold prices and gold ETFs like the SPDR Gold Trust in the second quarter of 2014.

With that framework in mind, it comes as no real surprise that the price of gold improved like it did over the past three months. In January, the interest rates on the benchmark 10-year Treasury slipped from a January 2nd peak of 3.0 % back to a low of 2.6% by the end of that month.

Then when interest rates (via bond yields) stopped slumping in early February, the U.S. dollar took the reigns of gold’s rally. The U.S. Dollar Index tumbled from 81.32 in late January all the way to a multi-month low of 79.27 by mid-March. That might not seem like much, but it’s quite a bit for currency.

It’s no coincidence that the price of gold started to stumble around the time the sawbuck began to recover. But, with yields not in a position to take back the reins and drive gold higher, the impact on gold was inevitable.

As for the longer-term undertow — inflation and demand — while the data is still incomplete for the two factors, we do know that inflation remains minimal at February’s annualized rate of 1.13%. March’s prices aren’t exactly screaming higher either.